Securities & Exchange Board Of India May Tighten Rules For Participatory Notes Issued By Brokers To Foreign Investors

The Securities and Exchange Board of India (SEBI) is likely to further tighten rules for participatory notes (P-notes), which are offshore derivative instruments issued by brokers to foreign investors not registered in the country.

It was found that there have been instances where foreign brokers issued P-Notes against Indian derivative contracts to overseas clients, who did not own the underlying local shares.

As per SEBI regulations, P-Notes in derivatives can only be issued for hedging, which means clients must own the shares, if they wish to buy the instrument.

As part of tightened rules, SEBI is likely to insist that brokers keep shares which are treated as underlying instruments against P-note derivative positions in a separate account.

The move would mean that foreign portfolio investor (FPI) brokers will be forced to buy new shares or transfer the existing ones in their own portfolio to the P-note subscriber account. Such a move will also increase tax liability and brokers are opposed to any such move.

However, the measure is likely to be a part of tightened operating guidelines for FPIs to be issued shortly.